You have found the home you want to purchase and have put down some earnest money on it. But then you discover that you also have to pay a down payment! What is going on? Was the money you paid previously not the down payment?

While both the money you paid for the earnest money and the down payment are not the same thing, they are entwined. Here’s what you need to know about earnest money versus down payment:

Earnest Money: “Good Faith” Held In Escrow

Earnest money is money that is placed in escrow and eventually goes towards your down payment to help fund your purchase. This money is considered a “good faith” deposit to show that you are serious about buying the home and is typically 1-2 percent of the purchase price. However, it is vital that you check the policies in your state and how much you can afford.

If you back out of the deal and breach your contract, this money will go to the seller to make up for the loss. Be aware that you can secure a refund agreement, and never ignore or waive your contingency rights: These help ensure that you get your money back if something goes wrong, like your mortgage not going through.

Down Payment: Paid Directly To The Seller

Your down payment is the money you put down on the house up front. This money is paid to the seller directly and not to the lender, which means when you borrow money for a home loan, you will only be borrowing for the amount of the home after down payment.

The amount of money you will need to put down for a down payment is determined by a variety of factors including:

  • Cash available
  • Price of the home
  • Your credit score
  • Your mortgage program

As always, before making such a big financial decision like purchasing a home talk to your lender and financial advisor. They will help you understand the process and determine how much home you can afford.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.